Last month I wrote a brief opinion piece on why I will not support SegWit2X. Since I published it, I thought much more about the problems caused by this fork, and will try to make my further arguments now.
I have two issues with 2X. The solution fixes a thing that isn’t broken (1) and the proposal originates from entities that have vastly different financial interests than the majority of the Bitcoin community, mine included (2).
Fixing Things Which Aren’t Broken
Supporters of SegWit2X say that their proposal will fix the issues with high transaction costs and slow confirmations. On the surface, this is apparently true: when there isn’t room for all transactions on a 1MB block, doubling block size will allow more transactions to be included, and the reduced scarcity will drive costs down.
However this is a short-term solution that asks a lot from the network.
- All nodes need to have their software upgraded to allow 2MB blocks.
- Many nodes may need to be retired as they will not have the necessary computing power to verify all transactions inside a freshly minted block within the average time a new block arrives.
- Extending the network with new nodes would become more expensive due to the increased requirements towards data storage and compute power.
In exchange, 2X offers meager returns. While it took 8+ years for Bitcoin to hit the 1MB limit, adoption rate is now so much higher that the new limit can be reached probably in months. What are we going to do then? Hard fork once more? How many times do we need to fork? And what is the purpose of a block size limit if this limit can be changed as soon as it begins to get in the way?
A good scaling solution would not aim to offer a simple 2x capacity increase. If we want Bitcoin to become universal, the blockchain must find a way to scale hundreds of thousands of times — ideally by remaining backwards-compatible with existing nodes and software!
But Would People Keep Buying Bitcoin If It Were Unusable?
Looking at the current price of Bitcoin (around $7,055.- as I write this) I keep asking myself: do we really need to scale Bitcoin at all? I mean, obviously people don’t seem bothered by the high fees and slow transaction times because they buy like mad!
If we give up on the idea to use Bitcoin as a daily payment tool and instead use it for long-term storage of value (savings) or safe transfer of large amounts of money (secure trans-border payments), it works fine as it is. If it didn’t, people wouldn’t be hodling.
Moreover, as long as more people are buying Bitcoin with the intention to keep it for long periods of time, it will never be a viable means of payment. Given the restricted supply of coins, putting more bitcoins out of circulation will keep driving demand up in paralel with increased adoption.
Bitcoin exchanges and miners obviously want transactions to be plentiful and cheap if this will attract more users, but what makes it necessary to use ONLY ONE coin for savings and spending? These two use cases have diametrically opposed demands, and the easiest thing would be to use different coins for savings and spending.
The Ideal Shopping Coin
A shopping coin must have very different properties than Bitcoin.
- Supply should be much higher than 21 million so that coin values align more naturally with fiat values
- Removing the cap on issuing new coins and/or other mechanisms that introduce mild inflation should be considered as a mechanism to stimulate nodes to stay on the chain and mine/validate blocks while discouraging long-term holding 1
- Block times should be shorter so that confirmations come faster
- Block rewards should be small in order to discourage mining for hodling purpose; transaction rewards should be able to sustain nodes
- Perhaps a different distribution model of the block reward should be adopted; one where full nodes share profits with validating nodes and a pool for developers’ salaries
Do we need to saddle poor old Bitcoin with all these properties? Or should we simply use a new coin that is designed especially to facilitate fast turnaround? Whoever finds a way to make a coin work within the parameters described above, will fix the problem with spending digital cash. He, she or they will become heroes in their own right — the coin doesn’t have to be called Bitcoin to do what it needs to do!
SegWit2X — Consensus or Just Arm Twisting?
Among the three main groups of Bitcoin users (developers/users/miners+merchants), miners and coin exchanges have significantly different financial motivation than everybody else.
- A developer may want to see his work making Bitcoin more secure or easier to scale, and is thus motivated to work now for unspecified future gains. These gains may be material (his work has extended the lifetime of Bitcoin sufficiently to help him through retirement) or immaterial (getting his name recognized as a contributor to world wealth and getting a Nobel Prize in Economics).
- A hodler will just want to preserve the value of her savings to help her retirement in 20 or 30 years. She is then motivated to maintain conservative approach and is resistant to all changes that might make Bitcoin different from what it was when she put her money into it.
- A miner needs to pay his electricity bill and achieve ROI on his mining equipment before it becomes obsolete due to increased block difficulty and the arrival of more power-efficient/faster performing mining hardware. A miner has a working horizon of 6 months.
- A coin exchange wants to be able to serve more people in order to make more money from fees. A coin exchange has a working horizon of 1 day.
See how miners & exchanges have completely different incentives from devs and hodlers? Of course miners & exchanges will support anything that makes them earn more right now. These are for-profit business operations, and such businesses generally cannot afford to contribute to future advances without earning money in the present.
But miners and exchanges are also beholden to users who buy and sell Bitcoin. If people were not demanding Bitcoin, miners wouldn’t mine, because the block reward would have no value. Exchanges wouldn’t exist.
Miners and exchanges are part of the service economy and through abundance and competition are inherently positioned as price takers. The theory of Karl Marx that workers should control the means of production has demonstrably failed numerous times in real economy and will fail in Bitcoin economy for the same reason: providers of a commodity cannot dictate its price in a free market. (Shitty practices like mining empty blocks to show who’s boss don’t count.)
Miners and exchanges are utility workers same as baristas and the kid you hire to mow your lawn. When they do their job, you benefit from it, but would you allow these same people to make decisions about your money and your financial future?
Thankfully, most people who have invested in Bitcoin seem to understand the contradiction between what is good for themselves and what miners and some exchanges are going after. That is why I am confident that this most recent attempt to ‘fix’ Bitcoin by increasing block size and trying to take over the name of the currency will fail miserably.
I also hope that future attempts to ‘fix’ Bitcoin that come from organizations and businesses which stand to immediately benefit from this ‘fix’ will be recognized as ways to reduce decentralization and enable centralized planning which will kill Bitcoin.
‘We Will Let Users Decide’
One final thought about how some exchanges (e.g. Xapo) plan to handle the 2X fork.
We are going to call the chain with the most accumulated difficulty Bitcoin or BTC . If the minority chain is the one with 1MB blocks we are going to call it BC1 and if the minority chain is the one with 2MB blocks we are going to call it BC2.
This is the most idiotic stance one could assume under the circumstances. Xapo’s profits come from customers, not from miners. Yet, they let the miners determine what to call the money the customers hold in their Xapo wallets?!
Pulling a Pontius Pilate just won’t work, and ‘democratic’ companies like Xapo will lose all credibility once their customers realize they are holding something different than the bitcoins they purchased.
As for everyone else, nobody needs to tell you what to call your coins. Before the fork comes, move your Bitcoins to a wallet under your own control and wait for the dust to settle.
I am a small business owner from Bulgaria. I have been tinkering with personal computers ever since I was a kid.
I feel enchanted by Bitcoin technology; last time I felt this excited was some 23 years ago when I first started surfing the internet using a 28.8k modem.